Consumer-engaged Plans Can Right-size Healthcare Costs: Understanding an HSA and Its Benefits

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In the decade since Health Savings Accounts (HSAs) were first launched, these powerful tax-favored accounts have grown in acceptance to now cover more than 17.4 million lives[1]. Momentum seems to be building too, with the IRS reporting HSA usage growing at an average annual rate of 15% since 2011[2].

HSAs serve as a tax-advantaged medical savings vehicle for individuals who satisfy a number of key conditions, including the enrollment in a qualified high-deductible health care plan (HDHP). When open for funding, the HSA offers employees an opportunity to use accrued pre-tax funds to help pay for eligible, but otherwise not-covered, medical expenses.

HSA/HDHP plans also offer a way to mitigate the potential impact of the Affordable Care Act's looming excise or Cadillac Tax, which levels a hefty 40 percent assessment against annual healthcare premiums exceeding designated thresholds for individual and family coverage plans (see The Luxury Ride Ends Here: Prepare for the Cadillac Tax Today).

The HSA/HDHP Partnership

The federal government requires HSAs to be paired with HDHP coverage, which delivers comprehensive preventive care on a first dollar basis at no cost. Minimum required deductibles for HDHPs in 2015 run between $1,300 and $6,450 for individuals and more for family plans [3], but coverage can be compliantly structured at levels that are lower than many realize.

When employees have to use their personal HSA account, they will make wiser and more thoughtful healthcare spending decisions, naturally leading to a new cost awareness - such as more discretion in the choices the individual will make (i.e. urgent care center as opposed to the emergency room).

Optimally, the longer-term benefit objective centers on fostering a cultural imperative where employees become active participants in their own healthcare decisions. As accountability grows and a participant's understanding about HSA mechanics increases, so too does awareness about vigilantly seeking preventive care, staying healthy and embracing wellness in order to optimize the power and value of the HSA.

"The HSA offers an exceptionally potent tool for creating better engagement and accountability with employees," said Joe Torella, East Region President, Employee Benefits Division, HUB International. "Employers need to get their arms around healthcare costs now by embracing a consumer-engaged health plan as a key function of developing a more strategic roadmap for their employee benefits. Left to their own devices, employees typically either don't have the tools they need to take an active interest in their healthcare decisions, or they are hidden-behind co-pay plans that devalue the cost of services actually provided."

Seizing an Employee Benefits Opportunity

Despite their growing popularity, employees with overstated fears about possible financial exposure sometimes may still deride HSAs. Although sloppy introduction can create surprise financial liability, when introduced, HSAs can help employees meet gaps left by a high deductible and thereby resolve many of these initial concerns.

Specifically, both the employee and employer are empowered to use pre-tax dollars to fund up to the annual required federal HSA limits - $3,350 for individuals, and more for families, in 2015 [2]. This dual-funding opportunity can unleash tremendous plan-design power that employers can leverage to create new employee benefit opportunities.

Torella suggests creating a wellness program, or incentivizing wellness triggers, including employer-paid funding opportunities that the employee has control over. For example, annual check-ups, biometric testing and participating in a health risk appraisal, might each generate new dollar contributions into the worker's HSA. Most employers struggle to accurately document ROI on wellness programs, but when built into the fundamental fabric of plan design and contribution modeling, the alignment of behavior, cost and return often produces undeniable ROI.

"We suggest that the savings the employer enjoys with an HDHP and HSA during the first few years of implementation be used to fund individual HSA accounts," said Torella. "Over time, the non-compensatory contribution can be replaced with a behavior-based contribution."

BONUS: The HSA Nest Egg

Unlike the flexible spending account (FSA) and company-funded Health Reimbursement Arrangement (HRA), HSAs are individually owned and unused dollars permanently roll over year to year. HSAs are not only funded with pre-tax contributions, but their interest accumulates tax-free as well, with withdrawals for qualified medical expenses remaining untaxed.

Perhaps the most unique aspect of the HSA is its ability to be used as an investment tool. Similar to an IRA, the HSA can be used for non-qualified medical or other expenses, including covering long-term care or COBRA premiums. Of course, using funds for non-qualified medical expenses opens the individual to associated taxes and penalties, but many users still appreciate the option to rely on this money for emergencies.

When pulled out before the age of 65, withdrawals carry a 20% penalty and amounts are taxed at the individual's tax rate. But after retirement age, the HSA, acting like an IRA, is taxed (again, for non-qualified expenses) at the individual's personal tax rate. Some HSA accounts feature investment opportunities with mutual funds, equities and bond options as well. In fact, HSAs have turned into an asset-generating account for many Americans, with more than $2.3 billion currently sitting in the investment portion of the nation's HSAs [4].

Conclusion

Although consumer-engaged healthcare plans like an HSA/HDHP can provide a number of benefits to both the employer and the employee alike, the accounts require an innovative approach to employee benefits education, especially when introducing them for the first time.

HUB employee benefits consultants suggest creating a three-to five-year strategic employee benefits plan that incorporates an HSA/HDHP as a core element of that strategy. For employees newly introduced to this concept, significant discussion and communication around its benefits, while providing incentives, both financial and otherwise, will help ease the transition period. Contact your HUB employee benefits consultant to find out if an HSA/HDHP is right for you, and how both you and your employees can get the most out of today's consumer-engaged healthcare offerings.